Harbour Monthly Commentary: The price is right in equities

Some investors think we are in an equity bubble . Other commentators say that equities are expensive. Our preference is to think that bonds are very expensive, driven by fear and extreme intervention by central banks. Although we recognise that the some of the tail risks experienced in 2008-2012 remain, they are fading. Perhaps the risk of inflation and the withdrawal of quantitative easing is the new risk to watch more closely.

While a pull back in risk assets wouldn’t be surprising after the strong rally, fundamentals for markets continue to improve, and relative to either bonds or cash, equities are still good value. Moreover, cyclical and growth stocks are set to benefit from a lift in economic growth rates, especially if growth remains in the Goldilocks territory

So the key question we get asked is: Are Australasian Equities expensive? Our view is no.

At 14.7 times earnings, the New Zealand equity market is above the long term average of 12.7 times earnings . Similarly the Australian market (ex-resources) is now trading on about 13.9 times, broadly in line with the long term average. On the face of it you could say the New Zealand  market is expensive. But set against this assessment is the fact that earnings growth is accelerating, corporate balance sheets are in good health, dividends are growing and corporate activity is picking up. Moreover, interest rates are at particularly low levels and there is no sign of building consumer price inflation (yet!). Most importantly relative to bonds and cash, equities still look very cheap.